Why Most of HP's Layoffs Will Be on the Services Side

By Chris Preimesberger |
Posted 2012-05-24

Why Most of HP's Layoffs Will Be on the Services Side

Hewlett-Packard, fresh off a tough day May 23 in which it announced a whopping 27,000 job cuts over the next two years, continues to revisit its overall mission, evaluate all its businesses, and stabilize its leadership. Can't argue with those best executive-type practices.

Looking closer at the job cut details, it looks very much like HP is trimming back much of its service business and planning to plow that savings back into its research and development, which had been cut way back for five years under Mark Hurd. Hurd was three CEOs ago, by the way, and he only left the company in August 2010.

Those 27,000 full-time jobsthough a high number on the face of itrepresent only about 8 percent of its workforce of 349,600. Yet, when the jobs are all eliminated by the end of fiscal 2014, it will be the largest layoff in the company's 73-year history.

CEO Meg Whitman (pictured) and the HP board know they have to be the bad guys here. Everybody knows it. The questions are: 1) Who stays, and 2) who goes?

eWEEK learned from a trusted inside source that a substantial number of those cutspossibly as many as 15,000will come at the expense of the company's Texas-based HP Enterprise Services division, formerly known as Electronic Data Systems, or EDS. HP bought EDS, which was founded in 1962 by H. Ross Perot, for $13.9 billion in 2008. Palo Alto, Calif.-based HP said it expects to save as much as $3.5 billion per year from the job cuts and other internal fiscal measures.

HP is calculating a total of $129,629.63 for each of those 27,000 people, give or take a few dollars and people. That, of course, would include salary, benefits, retirement and other categories for each person.

Is HP Throwing in the Towel on Services?

Why exactly is HP cutting back so severely its service force? Is it giving up in its decades-long turf war with IBM, and allowing newer kids on the block (Oracle, Dell, EMC and Cisco Systems) to move in?

HP isn't talking at this time, but you can bet the answer would be a stout "no." The relevant terms here are "streamline" and "more efficient operations." HP is not only trimming a lot of service-related jobs, but it is also becoming a more efficient company internally in order to save costs.

It is well-known also that HP wants to invest heavily in its new Converged Cloud initiative to help refresh some of those thousands of data centers that need updates.

Analysts Say the Cuts Are Painful but Necessary

John Madden (no, not THAT John Madden), principal analyst at Ovum, had a take on the HP situation that probably speaks for many industry observers.

"HP's restructuring is painful but necessary in order to restore market and customer confidence after two years of turmoil [read that as 'leadership turnover and indecision']," Madden wrote in a media advisory note. "What's somewhat encouraging is HP's indication that most restructuring savings will be directed toward R&Da part of HP's legacy and history which the company has sorely undervalued in the past few years, but which will be a critical component of HP's recovery in new product and service development."

However, the ability to reinvest will be dependent on the stability of the revenue stream; if sales soften, then Whitman will be under pressure from Wall Street to not invest, but cut more, Madden said.

"So as of now, we've seen the major pieces of Meg Whitman's restructuring and operations plan; the key missing piece is her long-term company vision and strategy, which hopefully will be revealed to an anxious customer base soon. Even with this restructuring, the question still remains: Just what kind of company does HP want to be next year, three years, five years from now?" Madden wrote.

Madden then wrote that Ovum recommends that enterprise and public sector IT managers "carefully assess the risks associated with committing to HP for strategic IT projects. Buying commodity-grade products, e.g., x86 servers running Windows, will have low risk. On the other hand, any projects that rely on innovation, sustained R&D, integration of acquisitions, and participation of key HP staff over time will have a much higher risk profile," he said.

'Future-proof IT Strategies'

"IT executives should carefully future-proof their IT strategies and procurement plans to incorporate the uncertainty that has settled over HP. Unfortunately, there are reasonable scenarios where HP does not survive as a strategic supplier of enterprise-grade technology and services," Madden said.

Well, that last part is pretty hard to imagine. HP cleared more than $1 billion this last quarter, despite its doldrums; it's not going to go into the red any time soon. The venerable old-school company will be a supplier of IT goods and services for a long while yet.

But the last several yearsstill only a small percentage of the company's celebrated historyremain a cause for concern. HP can erase a lot of that doubt by having its R&D department get back into the game and come up with new products that make a real difference, like it did in the old days with the pocket calculator and laser printer.

Chris Preimesberger is eWEEK's Editor for Features and Analysis. Twitter: @editingwhiz